Real estate trends 2017

Emerging Trends
in Real Estate®
Asia Pacific 2017
COURTESYOFCHINARESOURCES

Emerging Trends in Real Estate®
Asia Pacific 2017
A publication from:

iEmerging Trends in Real Estate®
Asia Pacific 2017
Contents
1 Executive Summary
3 Chapter 1 Seeking Yield in a Yieldless World
4 Transactions Sink
5 Allocations Are Rising . . .
6 . . . But Are Also Distorting Markets
7 Can Cap Rates Squeeze Lower?
9 Core—Can’t Get Enough
10 China: Key Themes
10 The New Core
12 Japan: Key Themes
12 Platform Deals Tap Land Banks
13 Diversifying across Asset Classes
15 Currency Speculation and Hedging
16 Metro and Satellite Areas
16 Developing Markets
18 Australia: Key Themes
19 Affordable Housing Boom
20 Prices Rise, Homes Shrink
21 Millennials and the Sharing Economy
22 Shared Workspaces Take Off
23 Monetizing the Coworking Trend
24 China Risk Remains Contained
25 Chapter 2 Real Estate Capital Flows
25 Outbound Capital Rises
26 Asian Institutions Just Getting Started
27 Government Restrictions Slow Chinese Flows
27 Deal Structures Evolve
28 Japanese Money Looms on the Sidelines
29 Brexit a Dud
29 Incoming Flows Remain Steady
30 Institutional Investors Now Dominate
30 Fundraising Still Tough
31 Investors Ready for Riskier Strategies
33 Local Banks Still Offering Cheap Debt
33 New Debt Sources Step Up
34 Limited Market for Mezzanine
34 China Bond Market Booms
36 Corporate Governance Hits Share Prices
36 Asia Pacific REITs Regain Momentum
39 Chapter 3 Markets and Sectors to Watch
40 Top Investment Cities
51 Property Types in Perspective
56 Interviewees
Emerging Trends
in Real Estate®
Asia Pacific 2017

ii Emerging Trends in Real Estate®
Asia Pacific 2017
Editorial Leadership Team
Emerging Trends in Real Estate® Asia Pacific 2017 Chairs
K.K. So, PwC
Paul Walters, PwC
Kathleen B. Carey, Urban Land Institute
Principal Author
Colin Galloway, Urban Land Institute Consultant
Senior Adviser and Contributing Researcher
Anita Kramer, Urban Land Institute
Senior Adviser
John Fitzgerald, Urban Land Institute
Contributing Researchers
Michael Owen, Urban Land Institute
Pauline Oh, Urban Land Institute
ULI Editorial and Production Staff
James A. Mulligan, Senior Editor
David James Rose, Manuscript Editor
Betsy Van Buskirk, Creative Director
Anne Morgan, Cover Design
Deanna Pineda, Muse Advertising Design, Designer
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Recommended bibliographic listing:
PwC and the Urban Land Institute. Emerging Trends in Real
Estate®
Asia Pacific 2017. Washington, D.C.: PwC and the Urban
Land Institute, 2016.
ISBN: 978-0-87420-397-4
PwC Advisers and Researchers
Australia
Andrew Cloke
Christian Holle
David Coogan
Ewan Barron
James Dunning
Jane Reilly
Josh Cardwell
Matthew Lunn
Naasha Dorabjee
Scott Hadfield
Tony Massaro
Vincenzo Dedé
China
Allan Zhang
Kathleen Chen
Hong Kong
K.K. So
Paul Walters
India
Abhishek Goenka
Anish Sanghvi
Bhairav Dalal
Indonesia
Brian Arnold
David Wake
Margie Margaret
Japan
Akemi Kitou
Declan Byrne
Eishin Funahashi
Hideo Ohta
Hiroshi Takagi
Koichiro Hirayama
Raymond Kahn
Soichiro Seriguchi
Takashi Yabutani
Takehisa Hidai
Takeshi Nagashima
Luxembourg
Carolin Forster
Kees Hage
Robert Castelein
Philippines
Malou Lim
Singapore
Chee Keong Yeow
Magdelene Chua
Wee Hwee Teo

1Emerging Trends in Real Estate®
Asia Pacific 2017
For the last several years, real estate markets across the Asia
Pacific have been shaped by a number of external forces that
are continuing to drive capital toward particular types of asset
classes and geographies. On the one hand, as bond rates
sink ever lower, real estate becomes increasingly attractive as
a means to deliver returns that fixed-income markets can no
longer deliver, driving up prices of core assets and creating
intense competition in what is now a crowded field. On the
other, fund managers with a mandate to deliver a certain level
of return are being forced into uncharted waters as they seek
out yield.
The main takeaways from this year’s Emerging Trends report
include the following:
●● Low transaction volumes in the first six months of 2016
reflect a shortage of available assets in major markets,
in particular Tokyo, as owners opt instead to refinance
properties at lower rates instead of selling them. In gen-
eral, investors are reporting fewer overall transactions but
bigger ticket sizes.
●● At the same time, yields continue to fall, although at a
slower rate. Looking forward, while most investors see
potential for some further compression—mainly as a
result of the sheer weight of new capital being pointed at
the sector—the trend may be reaching its limit, especially
given weak rental growth prospects in most regional mar-
kets (Australia excepted).
●● Core assets continue to be the favored asset class,
although product is becoming increasingly hard to
source. One way around this is for investors to assume
development risk by pursuing “build-to-core” projects.
Although these are not traditionally considered a core
strategy, many core investors are now willing to adopt
this approach, especially when it involves buyers such as
insurance companies that are likely to be long-term hold-
ers of the end product.
●● Investors with a mandate for higher return strategies
continue to migrate up the risk curve, both in terms of
sectors—pursuing niche strategies such as sub-logistics
facilities or data centers—and geographically, with emerg-
ing markets such as India drawing increasing attention.
●● Investments in metropolitan areas have become a popular
theme given ongoing trends of urbanization, land short-
ages in city centers, and low returns from central business
district projects. Cities across the Asia Pacific including
Sydney, Shanghai, Mumbai, and Jakarta are engaged in
major transportation construction projects that link sub-
urbs or satellite towns to city centers.
●● In line with markets in the West, Asia is embracing the
shared economy. The last 12 months have seen huge
growth in the adoption of shared workspaces, either as
standalone businesses that rent open-plan office facilities
to individual or corporate users, or on a corporate basis,
as large companies scrap conventional office layouts and
embrace hot-desking and collaborative working environ-
ments. On the residential side, shared spaces are also
becoming more prominent as rising prices continue to
shrink apartment footprints.
In terms of capital flows, Asia has seen a continuation of the
huge outbound movements of cash that began in earnest
Executive Summary
Survey Responses by Geographic Scope of Firm
Source: Emerging Trends in Real Estate Asia Pacific 2017 survey.
42+19+33+6C
6.2%
41.9%
32.5%
19.4%
Other
Global firm with a
global investment
strategy
Asia Pacific firm
focused primarily on
one country/territory
Asia Pacific firm with a pan–Asia Pacific strategy
Survey Responses by Country/Territory
Taiwan 0.2%
Myanmar 0.2%
Vietnam 0.3%
New Zealand 0.3%
United States 1.5%
South Korea 1.7%
Indonesia 2.2%
Philippines
India
Japan
Hong Kong
China
Australia
Singapore
3.3%
30.5%
18.7%
13.4%
11.8%
9.8%
6.3%

2 Emerging Trends in Real Estate®
Asia Pacific 2017
about three years ago. Some of this is dispatched to other
countries in the Asia Pacific (in particular Australia), but most
of it is finding its way to the West, especially the United States.
Large amounts also continue to migrate to London, despite
Brexit.
The main reason for surging outflows is the need to find an
investment home for the vast reserves of capital held by local
insurance companies, pension funds, and sovereign wealth
entities. Given the size of their reserves and the extent to
which they remain underallocated to real estate, Asian capital
will continue to migrate abroad in coming years in quanti-
ties that will be large enough to change the dynamics of real
estate investment globally. Institutional capital is now being
augmented by cash from private sources—either domestic
developers (in particular from China) or corporate and high-
net-worth players.
While the lion’s share of these outflows still originates in China
(despite government efforts to slow it down), Japanese institu-
tions, which have currently some of the biggest stockpiles of
capital in the world, are about to join the exodus. Fund man-
agers reported some early activity by Japanese institutional
capital in global real estate equities markets, primarily in the
United States.
In the capital markets, meanwhile, regional banks continue to
provide the majority of funding required by Asian real estate
investors. There seems little change in banks’ willingness
to lend, although some movement around the margins has
occurred, with Australia in particular seeing some tightening
in local credit markets. That said, bond markets have contin-
ued to grow rapidly, especially in China, where local currency
bonds have become a major funding channel for local devel-
opers, who have moved to refinance their debt portfolios to
take advantage of the cheaper capital.
Regional real estate investment trust (REIT) markets have con-
tinued to grind upward during the year, helped by falling base
rates and growing consensus among investors that interest
rates are unlikely to see significant upward momentum over
the near-to-medium term. Recent progress has also been
seen in some emerging markets as they move to establish
their own REIT frameworks, particularly in India, where many
investors are now anticipating the first REIT listings, possibly
before the end of 2017.
This year’s Investment Prospects survey shows a strong shift
away from last year’s favorites, which featured core markets in
Japan and Australia, in favor of emerging-market destinations,
including in particular India, Vietnam, and the Philippines.
This reflects investors’ growing disenchantment over the
prospects of sourcing available core assets in gateway cities,
together with a pressing need to identify assets that will meet
return expectations. However, while these markets undoubt-
edly offer opportunities that would provide the desired yields,
the same old problems persist—most emerging-market cities
have neither sufficient tenant demand for new product, nor a
critical mass of investable assets to accommodate the volume
of capital that investment funds have available to deploy.
Other major survey findings include steep declines in the
popularity of gateway cities (with the exception of Shanghai,
which has held its own). In particular, Singapore—an investor
favorite just a few years ago—has sunk to near the bottom of
the rankings as it struggles with overcapacity, falling demand,
and a slump in its residential sector.
Meanwhile, ongoing structural shortages of modern logistics
facilities continue to boost end-user demand throughout the
Asia Pacific region, making it perhaps the most favored of all
asset classes regionally.
A trends and forecast publication now in its 11th edition, Emerging
Trends in Real Estate®
Asia Pacific is one of the most highly regarded
and widely read forecast reports in the real estate industry. Emerging
Trends in Real Estate®
Asia Pacific 2017, undertaken jointly by PwC and
the Urban Land Institute, provides an outlook on real estate invest-
ment and development trends, real estate finance and capital markets,
property sectors, metropolitan areas, and other real estate issues
throughout the Asia Pacific region.
Asia Pacific 2017 reflects the views of
individuals who completed surveys or were interviewed as a part of the
research process for this report. The views expressed herein, including
all comments appearing in quotes, are obtained exclusively from these
surveys and interviews and do not express the opinions of either PwC
or ULI. Interviewees and survey participants represent a wide range
of industry experts, including investors, fund managers, developers,
property companies, lenders, brokers, advisers, and consultants. ULI
and PwC researchers personally interviewed 94 individuals and survey
responses were received from 604 individuals, whose company affilia-
tions are broken down below.
Investment manager/adviser......................................................21.8%
Real estate advisory or service firm........................................... 20.8%
Private property owner or developer......................................... 13.8%
Equity REIT or publicly listed real estate property company.....10.7%
Homebuilder or residential land developer................................. 6.9%
Private REIT or nontraded real estate property company.......... 5.9%
Institutional equity investor........................................................... 4.8%
Bank lender...................................................................................2.4%
Institutional lender........................................................................ 0.3%
Other entities...............................................................................12.5%
Throughout the publication, the views of interviewees and/or survey
respondents have been presented as direct quotations from the partici-
pant without attribution to any particular participant. A list of the interview
participants in this year’s study who chose to be identified appears at the
end of this report, but it should be noted that all interviewees are given
the option to remain anonymous regarding their participation. In several
cases, quotes contained herein were obtained from interviewees who are
not listed. Readers are cautioned not to attempt to attribute any quote to
a specific individual or company.
To all who helped, the Urban Land Institute and PwC extend sincere
thanks for sharing valuable time and expertise. Without the involvement
of these many individuals, this report would not have been possible.
Notice to Readers

Asia Pacific 2017
Chapter 1: Seeking Yield in a Yieldless World
Real estate’s appeal as an institutional asset class has never
been based on its reputation as a flashy performer. Highly
leveraged and structured deals aside, your staple prime
office asset is normally seen as a stodgy offering with a
saved-for-a-rainy-day flavor. But with sovereign bond yields
across the world inching toward and sometimes below
zero, fixed-income investors are casting an envious eye at
the neighboring tables of their real estate peers. A menu of
increasingly compressed cap rates may seem slim pickings to
real estate professionals agonizing over risk-adjusted returns,
but to bond traders contemplating a diet of NIRP (negative-
interest-rate policies), it has all the makings of a bounteous
feast.
Such is the mentality these days in global capital markets,
where pricing dynamics in any given asset class—and real
estate in particular—are driven increasingly by powerful exter-
nal forces that are hard to predict and even harder to control.
And it applies with all the more force in Asia, where diners
from the fixed-income table have been joined by an army of
well-heeled local institutions bearing hefty checkbooks and
an agenda to place cash in yield-driven investments sooner
rather than later. Unsurprisingly, this wave of new capital is
Seeking Yield in a Yieldless World
“Rates are going to stay lower for longer, and whether you’re institutional or high net worth or
whatever, your reaction is the same—either you don’t do anything and hold on to
the cash, or you bid up what you think is high-quality core and stick it in the drawer, or you say
I’ll put less money in the market and go high risk.”
Exhibit 1-1 Most Active Asia Pacific Commercial Real Estate Markets, First Half 2016
2014 2015 1H 16 Metro area Sales volume (US$ millions) YOY change
1 1 1 Tokyo
3 3 2 Hong Kong
7 7 3 Singapore
2 2 4 Sydney
5 5 5 Shanghai
4 4 6 Melbourne
6 6 7 Seoul
9 9 8 Osaka
10 10 9 Brisbane
68 68 10 Chongqing
8 8 11 Beijing
11 11 12 Nanjing
19 19 13 Mumbai
17 17 14 Perth
12 12 15 Taipei
38 38 16 Manila
18 18 17 Fukuoka
23 23 18 Kyushu
20 20 19 Kuala Lumpur
36 36 20 Shenzhen
Source: Real Capital Analytics.
n/a
302
17%
35%
816%
182%
41%
66%
99%
12%
9%
–52%
–50%
–63%
–67%
–17%
–55%
–58%
–45%
–58%
–53%364
394
458
496
549
696
818
824
1,050
1,064
1,198
1,385
1,602
1,830
2,421
2,996
4,194
6,822
8,628

Asia Pacific 2017
having an impact on both pricing and availability of those
stodgy core assets, and indeed just about everything else.
Nor is this simply a story about yield. In 2016, real estate has
also been drawing attention because of its reputation as a
safe haven. As one fund manager interviewed for this report
observed: “There’s a general air of unease at the moment.
Political risks are at a post–Cold War high. You have eco-
nomic risk—headline figures look pretty good, but income
inequality is going ballistic and you’re seeing no employment
or wage growth. Finally, you have markets that in most cases
are at precrisis highs. Put all that together, and while nothing
terrible has happened it feels like we’re really reaching the top
of most things.”
This confluence of cross currents between risk and profit
is dividing investors for the most part into two camps. First,
those with a safety-driven mentality, who look for assets that
will serve as stores of long-term value, primarily in gateway
cities such as Tokyo and Sydney. Second, those aiming to
outperform in a market already priced to perfection—“seeking
yield in a yieldless world,” as one interviewee put it.
Transactions Sink
Logically, the currently high demand for assets should lead
to increased deal flow. But Asia Pacific transaction volumes
actually fell in the first half of 2016, with market analysts Real
Capital Analytics (RCA) reporting a 39 percent year-on-year
decline in U.S. dollar terms.
Oddly, according to RCA, the only places able to buck the
softening trend were the same ones that investors had until
recently been avoiding, usually because of pricing concerns.
In Hong Kong, a wave of incoming capital from mainland
China has been picking up office properties both big and
small, while in Singapore a single big purchase has boosted
transacted values from an otherwise low base. The big three
Asia Pacific markets of Australia, China, and Japan, mean-
while, saw volumes decline 48 percent year-on-year—a
substantial falloff even when adjusted for the strengthening
U.S. dollar.
That said, transaction figures from other sources paint a more
positive picture. Among them, brokers Jones Lang LaSalle
recorded “moderate” Asia Pacific transaction declines of
just 4 percent over the same period—a minor decline in the
context of the record sales volumes in the 2013–2015 years.
According to one regional analyst, the only real weakness
in the Asian figures related to declining sales in Japan, with
Tokyo building owners opting to refinance rather than sell after
the Bank of Japan (BOJ) introduced NIRPs at the start of the
year: “My version of reality is that markets are more stable
than you might expect,” said the analyst. “We have a massive
weight of capital looking to get into the region, occupiers are
demanding space and paying up for it, and Asia is still the
engine of global growth—so if there has been a shortfall, it’s
not because of any underlying problems in the market.”
According to investors interviewed for this report, the main
change in 2016 has been a fall in the overall number of trans-
actions, together with an increase in big-ticket purchases,
generally at the behest of deep-pocketed institutional buyers,
and often in the form of platform or club deals. At the same
time, yields continue to shrink and there is a growing shortage
of assets available to trade—a deficit caused partly by the
tapering of a recent wave of selling by funds that had bought
assets before the global financial crisis and partly by the fact
that, in the age of NIRPs, property owners have little incentive to
sell. According to one fund manager: “The thought process of
most Asian owners is: ‘All I can see is low interest rates, and if I
look at the return on cost of my asset, almost everything is per-
forming out of its skin because values and rents have gone up
so much. When almost everyone is well into double-digit return
on cost, why would I sell? What would I do with the money?’ ”
Exhibit 1-2 Office Deals Analysis, First Half 2016
$40
$50
$60
$70
$80
US$billions
US$millions
$0
$5
$10
$15
$20
$25
$30
Office sector investment volume
(left scale)
2Q 161Q 164Q 153Q 152Q 151Q 154Q 143Q 142Q 141Q 144Q 133Q 132Q 131Q 134Q 123Q 122Q 121Q 124Q 113Q 11
Average office deal lot size
(right scale)

Asia Pacific 2017
This combination has made life harder for anyone unwilling
to pay top dollar for assets. As one private-equity investor
observed: “First and foremost, everything is really expensive.
So you’re looking at yields and you’re weighing up country
risk, political risk, economic risk, and you think, ‘Why would I
even bother doing a deal in China or the Philippines to get 5
percent or 4 percent gross [yield]?’ And probably 2 percent to
3 percent net at a time when rents are really high as well and
economic growth is coming off—so it’s very hard intellectually
and emotionally to pay those prices.” Perhaps unsurprisingly,
industry profit expectations have taken a hit, with our survey
projections sinking to their lowest level since 2013.
Allocations Are Rising . . .
The relatively slow pace of recent buying contrasts with the
ever-growing flows of capital now targeting Asian real estate.
While no accurate way exists to measure just how much new
money is being pointed at property assets regionally, inter-
viewees agreed that allocations continue to grow, especially
from sovereign and institutional players.
According to one investor: “Generally speaking, allocations
historically have averaged high single figures, roughly 8
percent to 10 percent for Western insurance companies. But
there’s been a lot of talk about pushing that up to 10 percent
to 15 percent, which is huge—in nominal terms, it’s a doubling
of real estate as a percentage of the portfolio.” Given that
allocations at Asian institutions are currently either much lower
or nonexistent, the pressure to get capital into the market is all
the greater. As another consultant commented: “Real estate is
up there now as probably the number-one option compared
to other places you could put your money. All the funds we’re
dealing with are increasing allocations—this only puts more
pressure on markets where there’s already a lot of liquidity.”
Given the scarcity of suitable assets, much of that new
money is now accumulating on the sidelines, even as more
incoming capital looms on the horizon. According to a man-
ager at one large fund group: “I think the pile of money will
only increase, because the trend line is definitely more money
being allocated.”
Exhibit 1-3 Volume by Transaction Type, Asia Pacific
US$billionsYear-over-yearchange
$0
$10
$20
$30
$40
$50
$60
Entity
Portfolio
Individual
'16'15'14'13'12'11'10'09'08'07
-75%
-50%
-25%
0%
25%
50%
75%
100%
125%
'16'15'14'13'12'11'10'09'08

Asia Pacific 2017
One obvious reason for increased allocations is that Asian
institutions in particular now have that much more money
to invest. Diversification is another theme—both for local
institutions that have traditionally invested little, if any, capital
in real estate, and for international funds that have long been
underallocated to emerging markets.
Perhaps the most important factor, though, is the widespread
perception of a secular shift in markets as investors and devel-
opers come round to the view that U.S. base rates are unlikely
to move significantly higher. As one fund manager observed:
“A lot of the U.S. corporates loaded themselves [with debt]
and refinanced their balance sheets. But their top line is not
moving, so if interest rates go up, there’s a major problem.
Everybody starts talking about the housing market when inter-
est rates go up, but that’s not the place to focus because what
is pushing the U.S. economy is literally the top-ten market cap
companies.”
As long as U.S. base rates stay low, sovereign bonds glob-
ally will probably continue to underperform real estate. This
thinking applies especially to Japan, where huge amounts of
institutional capital are just beginning to rotate from govern-
ment bonds into alternative asset classes. “It speaks to the
lower-for-longer theory,” said one fund manager. “Lower
returns and lower interest rates for a much longer period of
time—and I think in general that’s now the base case, with the
risk being to the downside rather than the upside.”
The low-interest-rate scenario translates directly to higher
demand for real estate generally and core assets in mature
markets in particular. As another fund manager put it: “It’s
defensive—basically you’re agreeing with the fact that rates
are going to stay low for a long time, real estate is a proxy for
a bond, and, okay, maybe I’ll get less than historical bench-
marks, but honestly who cares about historical benchmarks?
I’ve got cash today and there’s no way I can take a negative
real return.”
. . . But Are Also Distorting Markets
The arrival of such huge amounts of new capital creates
issues, however. For one, it helps push cap rates to alarm-
ingly low levels of risk-adjusted returns, especially compared
with those seen in supposedly safer markets in the West. On
a total-return basis, benchmarks are proving more resilient,
although they have registered significant declines in China,
Hong Kong (where mainland capital is active), and Singapore
(which is in a cyclical downturn). According to one fund man-
ager: “It’s a subject that doesn’t have a clear answer, but I do
think that more people are starting to question the relative risk/
return. It’s a sentiment issue. When China was the [regional]
growth engine, you were probably fine on a risk-adjusted
Exhibit 1-6 Changes in Portfolio Composition to Achieve 7.5 Percent Return, 1995–2015
Source: Callan Associates.
100C 52+20+5+14+5+4C 12+33+8+22+13+12C1995 2005 2015
Bonds 100%
Private equity 4%
Private equity 12%Real estate 5%
Real estate 13%
Non-U.S. equity 14%
Non-U.S. equity
22%
U.S. small cap
5%
U.S. small cap 8%
U.S. large cap 20%
U.S. large cap
33%
Bonds 52% Bonds 12%
Exhibit 1-4 Real Estate Firm Profitability Trends
good
excellent
fair
201720162015201420132012201120102009200820072006
Source: Emerging Trends in Real Estate Asia Pacific surveys.
Exhibit 1-5 Firm Profitability Forecast for 2017
ExcellentGoodFairPoor
7.8% 45.6% 40.2% 6.4%
Prospects for profitability in 2017 by percentage of respondents

Asia Pacific 2017
basis, but now that’s become questionable and a bit of the
luster has come off—probably rightfully so. Basically, what
you’re saying is that ‘I don’t think my upside is so good,’ and
I think that makes sense. My downside is still the same as
before.”
While the oft-cited justification for sinking cap rates is that
prices can be benchmarked by reference to the spread
between yields on real estate and sovereign bonds (which
are currently at ultra-low if not negative levels), the rationale
begins to break down in the current environment because it
fails to address the risk that yields may spike if bond investors
calculate that holding debt at zero or negative rates is not only
unprofitable, it’s downright dangerous.
According to one fund manager: “In many markets, with the
exception of China, you have relative spreads to bond yields
that look quite attractive. But you could argue that bond yields
are just artificially low and don’t really reflect ‘risk free,’ which is
what you’re trying to base your spread on. And if you’re start-
ing at ten-year bond yields of 30 basis points [bps] and they
rocket to the stratospheric levels of 2 percent, which histori-
cally is still [an] incredibly low cost of capital, the capital value
of that change is huge—those bonds have lost an enormous
amount of value, and you’ll still only get 30 bps for holding
them. If that happens, your 3.5 percent to 4 percent cap
rates—and, in some cases, in Japan, 3 percent cap rates—
look pretty anemic.”
This may be why investors are reluctant to chase cap rates
lower even as the yield spread to sovereign bonds continues
to widen. Another reason, however, is that ubiquitous rental
incentives in various major markets in Asia create a mislead-
ing impression of what rents are really worth. This applies in
particular to Australia, where, in the words on one Sydney-
based fund manager, “the reality is that you have incentives of
between 27 percent and 30 percent in the [office] market, and
once you layer these in, together with your cost of debt, your
effective spread to the base rate is probably only about 1 per-
cent.” Other major office markets offering significant (though
not quite so generous) incentives include Tokyo and Seoul.
A further issue created by higher allocations is that private
equity funds are now being regularly muscled aside by
sovereign and Asian institutions that enjoy generally lower
hurdle rates and cost of funding. “I think people’s mattresses
are by now pretty full,” lamented one private equity manager.
“There’s a big difference between international investment
funds and the sovereign and domestic institutions. For people
like us, it’s a pretty tough investment environment—pricing is
high, so whether you’re value-add or opportunistic or core, it’s
quite difficult to underwrite to the target returns your investors
are looking for, given where your entry prices are. There’s defi-
nitely no low-hanging fruit, and I can’t see any obvious market
calls where you say, ‘O.K., we can go into China, for example,
and buy office.’ At the same time, buying other income-pro-
ducing property types is eye-poppingly expensive, and we’re
now well into the rental-growth cycle.”
Can Cap Rates Squeeze Lower?
In 2015, expectations for further cap rate compression in Asia
were framed mainly in terms of expectations for rental growth.
Twelve months later, those increases have been more or less
realized, but the prospects for significant further near-term
gains on commercial sector rents have dimmed. Interviewees
from Japan (“a little bit in the tank, but it’s slowing”) to China
(“a little, but pretty asset-specific and not much better than
inflation”) to Hong Kong (“no real momentum”) and Singapore
(“rents off significantly and I think continuing to fall”) sug-
gested moderate, if any, upward rent adjustments. Sydney is
the exception to this pattern, with rents expected to “provide
double-digit rental growth over the next few years,” mainly on
the back of supply shortages.
With cap rates everywhere in Asia now below historical norms,
and with the added caveat that the above-mentioned yield-
spread thesis may no longer apply when interest rates turn
negative, finding a rationale for further compression is becom-
ing harder. Of course, that does not mean that values can’t
rise anyway, as they have for the last several editions of this
report, often in defiance of investor expectations. That indeed
seemed to be the gut feeling of most interviewees this year,
although some found it hard to admit.
How low they might go is an open question. One Japan-
based fund manager suggested that “a lot of people have
rationalized [office yields] down to 3.2, and if you are a certain
core investor they’re O.K. if there’s no growth—if there’s no
downside risk, they’ll hold for stability. I don’t know how they
Exhibit 1-7 Yield Spreads Widen in Tokyo and Australia
Basispoints
0
1
2
3
4
5
6
Commercial, Australia
Office (Otemachi, Tokyo)
Jan
2016
Jan
2015
Jan
2014
Jan
2013
Jan
2012
Jan
2011
Jan
2010
Jan
2009
Sources: CBRE Research, Real Capital Analytics.

Asia Pacific 2017
calculate the hedging cost, the interest rate, and so on, but I
think it’s safe to say that the macro Japan is saying there is no
significant interest rate hike coming in the next five years.” The
same manager also suggested that very high-end retail yields
in Tokyo’s Ginza district could sink below 2 percent in 2017.
In addition, a sub–3 percent environment for office yields was
certainly on the minds of several Tokyo-based interviewees.
Certainly, the sheer weight of local institutional capital seems
to militate in favor of more compression, especially given
that most Asian players enjoy the luxury of cheaper capital
and (probably) lower targeted returns. Making that case
to an international investor base may prove a tougher sell,
though even here perspectives are beginning to change. As
one institutional fund manager observed: “There are clearly
some—though definitely not all—institutions in Europe and
the United States that are now willing to buy or invest in core
returns in Asia as a growth play, and not necessarily as an
income play.”
Another investor commented: “I think in time—especially on
the core side—cap rates will come down, unless investors
take this decision that they’ll just stay in cash. But everything
you read and see from our U.S.-based investors is that there’s
clearly a shift to both core and noncore in the international
space, that they’re really looking at it as diversification, and
maybe their expected returns are now a bit lower, though
they’re not necessarily publishing that.”
Exhibit 1-8 Projected Office Sector Rental Growth, Fall 2016 to Fall 2020
3.8%
3.7%
2.7%
2.3%
2.2%
1.7%
1.5%
1.2%
1.2%
0.8%
0.8%
0.7%
0.6%
0.6%
0.1%
0%
0%
–0.5%
–1%
–1.1%
Compound annual growth rate to 2020
Kuala Lumpur
Perth–CBD
Singapore–Shenton Way
Singapore–Marina Bay
Guangzhou
Singapore–Rafﬂes Place
Nagoya
Hong Kong–overall
Yokohama
Adelaide–CBD
Osaka
Tokyo
Beijing
Seoul–CBD
Brisbane–CBD
Shanghai–Puxi
Hong Kong–central
Shanghai–Pudong
Melbourne–CBD
Sydney–CBD
Source: Deutsche Asset Management, August 2016.
Exhibit 1-9 Prime Office Yields, 2014–2016
Basis points
4.8 4.8
4.5 4.5 4.6 4.4 4.2
4.5
2.8
2.2
3.5 3.5
3.8
3.3 3.3
8.1 8.2 8.2
8.8
6.1
6.7 6.7
6.4
6.8
6.4
6.1
6.8
6.1
5.45.4
5.1
9.8
9.4
3.1
2.3 2.4
2.8 2.8
4.3
2Q 20162Q 20151Q 2014
AucklandBrisbaneMelbourneSydneyMumbaiNew DelhiSingaporeSeoulTokyoTaipeiHong KongShanghaiBeijing
Source: CBRE Research.

Asia Pacific 2017
Core—Can’t Get Enough
With so much institutional capital in circulation and so many
investors now adopting a defensive stance, appetite for
core assets continues unabated. This translates to ongoing
demand in the Asia Pacific region’s two main core markets,
Tokyo and Sydney—a situation that is unlikely to change soon.
According to one Sydney-based fund manager: “It’s difficult
to see a reversal of appetite in a setting where we’re in a risk-
off environment with liquidity.”
As much as demand is strong, however, supply of core
product is thinner than ever. According to one analyst:
“There’s plenty of liquidity, but there aren’t many assets to
trade. What’s more, there’s a mismatch between pricing and
product quality—you want to buy prime, and you’re seeing
Grade-B buildings.”
In part, this simply reflects the norm of Asian landowners
retaining the best buildings for themselves. As one investor
said: “The good assets are so closely held it’s really a dis-
torted market, so you’re not going to see much two-way flow in
core because the owners here are not portfolio rebalancers,
they’re just long-term holders.”
Another, more recent, reason, however, is that ever-sinking
interest rates have removed incentives to trade even for own-
ers willing in principle to do so. Instead, they simply refinance
their deals and hold on. Several interviewees suggested this
as the main reason for the overall softness in regional transac-
tions in the first half of 2016. As one interviewee put it: “People
are thinking they can earn more by cutting their interest costs.
Also, people are thinking that if they sell their assets, they
don’t know how to redeploy their capital. Beyond that, they
also believe that Asian real estate markets still have room to
run in terms of capital growth.” These problems in access-
ing core product probably account for the steep decline in
popularity of Tokyo and Sydney in this year’s ULI investment
prospect rankings (see chapter 3).
One result of this tightness in core supply is that investors are
looking again at assets in Hong Kong and Singapore that had
previously been off the radar because of their high prices.
Hong Kong commercial transactions rose some 17 percent in
the first half of the year, according to RCA, with buying driven
mainly by mainland Chinese corporate players, often on the
hunt for trophy assets rather than pure investments. Some
international investors also voiced renewed interest in Hong
Kong assets; but with more mainland buyers rumored to be
lining up for major single-building acquisitions if and when
they appear, competition will be stiff.
The beaten-down core space in Singapore also has seen
revived interest, although prices have yet to fall enough to
attract serious buyers. As the only major market in Asia cur-
rently in a down cycle, funds are looking for reasons to invest
there, but for the most part aren’t finding them. According to
one fund manager: “Everyone’s looking out for it, everyone’s
expecting to see deals, but I’m still struggling to find them, to
be honest—there’s a lot of supply of everything.” Still, supply
is the one thing lacking in almost every other market, so there
may be some early takers. As another fund manager said:
“When you take a step back and look at all the economies in
Asia, the one place that has strong long-term potential, I think,
is Singapore. So if I can get a good asset at a reasonable
price in that market, that’s probably one of my number-one
picks.” Chinese investors were rumored to be looking in
Singapore and may be early buyers given their relatively low
level of price sensitivity.
Exhibit 1-10 Importance of Various Issues for Real Estate
in 2017
Social inequality
Japan’s Abenomics
Provincial and local budget problems
Immigration
National fiscal deficits/imbalances
Terrorism/war/epidemics
Income inequality
Sharing economy
European financial instability
Tax policies and financial regulations
Global economic growth
Macroeconomic issues (inflation, currency volatility)
Job and income growth
Interest rates and cost of capital
Economic/financial issues
Social/political issues
Real estate/development issues
1 2 3 4 5
4.19
3.99
3.91
3.74
3.48
2.98
2.95
2.69
3.51
3.21
3.19
3.05
2.97
2.79
4.15
3.76
3.70
3.67
3.60
3.49
3.44
3.25
3.24
1
No
importance
2
Little
importance
3
Moderate
importance
4
Considerable
importance
5
importance
Great
Environment and sustainability
Deleveraging
Affordable/workforce
Refinancing
Future home prices
Construction costs
Vacancy rates
Infrastructure/transportation
Land costs

Asia Pacific 2017
The New Core
One way for core investors to source assets in such a
thin market is to redefine what is meant by core investing.
According to one interviewee: “Core money wants to be more
active, and I think there’s a frustration in many cases it can’t
find a home. So the risk profile is changing, moving into mar-
kets that a couple of years ago they would have said were too
opportunistic and moving to product that has a greater risk
profile to it.”
This can mean different things to different people, but is a
generally controversial idea given that this “new core” tends
to come with decidedly noncore levels of risk. According to
one core fund manager: “I don’t think we should go down this
road. I think if you start chasing returns and adding risk, then
you shouldn’t be in an open-end core structure. If you’re lucky
and that works for you, it can help to accelerate the start of a
core open-ended program because people will focus on the
returns and not the risk. But if it goes wrong and you’ve taken
inappropriate levels of risk for a core strategy, you’re dead in
the water—it’ll take you another cycle or more to get back to
the level where people have got confidence to allocate capital
to you again.”
At the same time, situations exist where even conservative
managers are willing to bend convention. In Asia, this applies
most notably to build-to-core projects, which generally feature
levered returns in the area of 13 to 15 percent. One opportunis-
tic fund manager involved in developing core projects noted
a “sea change” over the last 12 months among potential institu-
tional partners “in terms of the willingness to take the types of
risks we’re taking for the returns that we’re generating.”
It is a strategy that many core investors are now eyeing seri-
ously, therefore, in particular for projects in Australia, where it
has “has provided some really good outcomes for investors.”
As one fund manager observed: “If you’re an insurance com-
pany or a sovereign fund investing in core assets and your
view is that you are willing to take risk today to secure those
assets and not sell them because you have long-term liability
streams, then would I be willing to take development risk or
China: Key Themes
China continues to be something of an enigma in invest-
ment terms, with a multitude of cross currents muddying
the waters for foreign investors looking in from the
outside.
As usual, those with experience in navigating the idio-
syncrasies and latent inefficiencies of China’s markets
can still realize sometimes-outsized profits. It is probably
fair to say, however, that opportunities for arbitrage are
becoming harder to find, and while plenty of international
capital remains interested in putting money to work there,
it is not the imperative it once was. As one veteran China-
watcher put it: “Certainly over the last year or 18 months,
I’ve heard more people saying the challenges in China
are even greater than they anticipated—I just don’t think
there’s quite the love affair with commercial real estate
that there used to be.”
Various reasons for this exist. First, the economic back-
drop has deteriorated. While Chinese GDP growth of 6.7
percent remains far higher than that seen in developed
economies, momentum has slowed even as macro risk
(particularly in the form of corporate debt levels) is grow-
ing. Second, pricing levels have been distorted by the
enormous amounts of domestic capital now seeking a
home in real estate assets, both from private individuals
and companies and from domestic institutions, which are
overflowing with cash and remain chronically underallo-
cated to the sector.
As a result, residential markets in first-tier cities have
soared to dizzying heights, land values have gone through
the roof, and commercial property prices continue to grind
northward. As one fund manager commented: “If they
can’t get their capital offshore and the banks and stock
markets don’t have appeal, they put it into real estate. It’s
the same story as in every other market in the world, but
for different reasons. So you get into this domestic value
trap. When you feel like that, you end up trying to buy the
best possible properties, and the incremental dollar you
pay to get that asset is secondary.”
The current tightness in Chinese markets has done
little to deter local investors, whose faith in capital-value
growth emboldens them to accept yields that, anecdot-
ally, are even lower than those cited in published data.
The impact on foreign investors, however, has been
more nuanced. Certainly, a large (and arguably grow-
ing) component of international capital has taken issue
with valuations, especially when already-thin pickings
are further eroded by deal-structuring problems that
can generate higher taxes and cash-flow repatriation
problems.
At the same time, however, a significant base of foreign
investors continues to view China favorably. As one
investor said: “China is getting bad press, and people are
generally quite nervous about it. But I think people who
are here in the region are reasonably comfortable.”

Asia Pacific 2017
leasing risk on high-quality locations with good-quality devel-
opers? I think you can suggest that’s a core-type strategy.
Likewise, if [I’m] building to suit for an identified end user, am
I really taking that much risk? Clearly it’s not core risk. But if I
want to sell on completion and there’s an insurance company
or a sovereign or pension fund in the wings, is it a good way
to access core stock? It’s probably better than paddling in the
ocean to buy it from the developer.”
South Korea was identified by one investor as a particularly
good market for a build-to-core strategy due to use of an
unusual standard development model whereby construction
companies generally provide guarantees of project success.
The result is that new stock is generally strata-sold in order
to provide protection for builders, which in turn has created
a chronic shortage of en bloc buildings. Investors willing to
devote equity on a build-to-core basis are therefore likely to
end up with a core product with a ready audience of institu-
tional buyers upon completion.
Otherwise, core investors are moving up the risk curve by
migrating to new destinations or asset classes, preferably in
markets that have developed economically to the point where
risks are moved lower. Most obviously, this includes Shanghai,
now considered, according to one analyst, a “completely core
market” for international investors, who see it as a regional
gateway with less exposure to short-term cycles. This is
a far cry from just a few years ago, when most foreigners
considered its 4 percent yields a bridge too far in terms of
risk-adjusted returns. Since the beginning of 2014, however,
35 percent of all Shanghai prime office transactions—and 65
percent of those valued at more than US$100 million—have
involved foreign buyers, according to Jones Lang LaSalle.
Leverage is another way for core investors to boost returns.
Levered core, therefore, has become an option in Tokyo,
where the availability of fixed-term sub–1 percent bank debt
has instilled more confidence that highly levered deals can
ride out short-term downturns.
On the core side, Shanghai has seen a resurgence in
foreign investment over the last couple of years, despite
high prices. In part, this is because many Western
institutions that remain underallocated to Asia see it as a
natural target for diversification, and in part because the
emergence of Chinese insurance companies and other
big domestic players has transformed the city into “a true
institutional market,” especially for those willing to take
development risk.
For opportunistic investors, the landscape has changed
radically in recent years, as China’s markets become
increasingly fragmented and difficult to navigate.
According to one opportunistic fund manager: “Over the
last decade, the way everybody made easy money was
in residential joint ventures. But we’ve seen that waning
for several years now, and I think the sweet spot in that
space is gone. Margins are too thin, and if you look at
land sales prices, they’re now multiples of current ASPs
[average selling prices]; we don’t see that kind of growth
going forward.”
Until recently, smaller third- and fourth-tier cities offered
high returns and were structurally undersupplied. Today,
they suffer from major (though to be fair, improving)
oversupply issues and are, generally speaking, too
unsophisticated to offer scope for niche strategies. At the
same time, high prices preclude opportunistic returns in
the biggest cities (i.e., first-tier cities). This has left many
opportunity funds gravitating to second-tier locations in
search of deals.
Still, China is a big place and probably unique among
Asian markets in terms of its potential for true opportunistic
returns. Ongoing themes of developer consolidation; an
overall lack of experience in project planning and asset
management; and volatility in asset pricing, the economy,
and availability of capital all serve to create gaps in the
market that can be exploited by experienced managers.
These issues are not about to go away—indeed, volatility
may be set to increase, according to one fund manager,
who forecast that future cycles would be shorter and more
localized than the previous five-year norm.
Exhibit 1-11 Commercial Real Estate Transaction
Volumes in China
Foreign capital
Domestic capital
RMB billions
2014–20152012–20132010–20112008–2009
23.94
30.56
59.67
51.20
90.06
160.44 161.33
204.80
Source: JLL.

Asia Pacific 2017
Platform Deals Tap Land Banks
Another aspect of the growing appeal of build-to-core
strategies is that they are contributing to rising land prices in
gateway cities across the Asia Pacific. According to one fund
manager: “When you look at what people are bidding for land
sites now, you can see that’s what they’re thinking. The returns
on development are going down because people are bidding
more and more for the land—everyone wants to do this now.”
This, in turn, is boosting the already growing appeal of
platform deals because it allows investors to get access to
land owned by target companies that would not otherwise
be available, or if so, only at higher prices. Shanghai, for
example, recently saw international pension funds invest in
one prominent local developer as a means to access to its
development pipeline.
While such deals generally involve healthy target companies,
they are also occurring at the other end of the spectrum,
where distressed developers become interesting investments
because of their land banks. This is happening in particular in
China, which has plenty of cash-strapped developers and a
real shortage of affordable land.
Generally, foreign investors will use their local partners to
pursue such deals rather than do so directly. Although trans-
actions can be merger-and-acquisition (M&A) style takeovers,
opportunistic investors are generally interested in project-
level acquisitions. According to one such fund manager: “In
the past, you’d talk to your [local] partners [in China] about
going in and refurbishing older office buildings or even taking
over failed residential projects. But they never wanted to do it
because it was easier just to buy land from the government.
But where land prices are going now, it’s forcing our partners
to be more creative, and even banks are funding them to go
look at stress or distress. We haven’t seen a lot of it yet, but
we know some of our partners have pipelines and we say, ‘If it
seems to make sense, bring it to us and we’ll take a look.’ It’s a
way to get cheaper land.”
India is another market where there is “huge opportunity” to
buy good-quality land from financially stressed developers at
a time when authorities are pushing banks to fix their balance
sheets. According to one institutional fund manager: “We are
seeing opportunities to get very high-quality real estate that
was never for sale before because developers aren’t able to
Japan: Key Themes
While the Japanese economy does little to inspire con-
fidence, most investors remain positive about Japan as
a real estate destination. The depth and liquidity of the
commercial property market in Tokyo single it out as Asia’s
biggest core market, although in reality most core assets
there are picked up by Japanese REITs (J-REITs) and other
local players who are often willing to outbid foreign buyers.
International funds therefore tend to adopt other strategies,
which are fortunately abundant. As one fund manager said:
“I’m not seeing in Japan any slowdown in foreign invest-
ment—it’s phenomenal what’s happening, really strong.”
The current appeal of the Japanese market lies in its posi-
tive yield spread between real estate assets and the cost of
capital. One reason for this is the Bank of Japan’s ongoing
bond repurchase program, which has soaked up most of
the Japanese government bonds that are held by domestic
banks or otherwise available on the open market. Banks
are left with few investment alternatives than to lend to real
estate at “ridiculously cheap” rates.
With seven- to ten-year fixed-rate lending commonly avail-
able, investors are able to structure highly leveraged deals
at very low cost. While most investors opt to lever at around
60 to 70 percent, banks have been willing to lift this as high
as 90 percent. Many investors are gun-shy about this strat-
egy given the disastrous outcomes of similar bets taken
before the global financial crisis, but in principle it means,
as one foreign opportunistic manager said: “If you buy in
Japan at a 4.5 percent yield and finance it at, conserva-
tively, 1 percent, you can set yourself up for a 7 percent
return cash-on-cash without doing anything.”
Residential is currently the sector of choice for this strategy
because high occupancy levels and stable rents make for
a “quite bond-like” income stream. While stiff competition
for assets has pushed residential yields down to 4 percent
or less, lower borrowing costs mean that levered yields
have remained constant. Potential for modest rental growth
gives this strategy obvious appeal, although the field has
recently become crowded and assets are now harder to
source.
Office assets have been a perennial investor favorite in
Tokyo, but the sector has lately fallen out of favor amid fears
of an upcoming supply glut and soft absorption as com-
panies adopt a wait-and-see approach over the impact
of the rising yen on exports. Current expectations are that
vacancies may rise and rents stagnate or decline after
several years of double-digit growth. As a result, there was
a reluctance to buy office among many interviewees. As
one interviewee said: “I always like office in Japan provided

Asia Pacific 2017
refinance, and the banks are unwilling to hold on their books
for extended periods of time.”
Diversifying across Asset Classes
The theme of diversification is not restricted just to core
strategies; it also applies more generally as investors branch
out looking for yield. It can mean, firstly, that investors have
to be more enterprising in identifying deals, often by tapping
pre-existing relationships with banks or corporates with exist-
ing interests in real estate. As one fund manager said: “Our
view is that 80 percent of the capital is chasing 20 percent of
the deals, so if you’re looking through that prism, there’s too
much capital chasing too few deals. But we also think there
is another 80 percent of opportunities in the market that 80
percent of the market has not seen or is not able to execute
on, and in that instance you can still get very high-quality
real estate with very good returns without competing with 80
percent of the other people in the market.”
Diversification can also mean exploring unconventional asset
classes. According to one opportunistic fund manager: “I
sense that people are not doing as many deals generally, and
that everyone’s now looking at funky sectors, for things that
have fallen into cracks in the market, or for things that have
been overlooked. So every second meeting you have is about
student dorms or worker dorms or millennial housing—every-
one’s talking about these things.”
Until recently, investors spent a lot of time looking at niches
but did little actual buying, mainly because they involve often
obscure businesses that are outside their core competen-
cies. As one investor said: “My personal view is that these
niche strategies are a sign of boredom and you’re just trying to
justify what you want to do. If we were to do something niche,
we’d maybe go as far as student housing, but would we go to
hospitals, data centers, or elderly housing? No, it’s just not our
expertise. I mean, what do we know?”
Despite this, a general sense existed among interviewees that
niche strategies are today investable, and that more niche
deals are being done. As one fund manager put it: “Had you
asked me nine months ago, did we have a strategy to pursue
them, I’d have said, ‘No, not at all.’ In the past, we were more
thematic: urbanization, middle class, focus on the hous-
ing sector. But it’s very hard to be thematic in China now. It
you can get it at the right entry price. The entry price today
is not great.”
Retail also has been a strong sector in recent years, at least
partly because the falling yen has attracted high-spending
tourists, especially from China. Today, though, the yen has
strengthened and the tourists are spending less. The sector
has lost much of its appeal as a result.
Tokyo transaction volumes were surprisingly low across the
board in the first half of 2016. This is partly because J-REITs
have found it difficult to make accretive acquisitions given
their rising share prices, and partly because many owners
who were expected to sell their assets have instead chosen
to retain and refinance them after interest rates fell. Cap
rates continue to compress steadily. Although J-REITs may
be buying at 3 percent, most good-quality centrally located
assets now sell at around 3.5 percent.
Going forward, more domestic capital is expected to enter
the market as Japanese institutions seeking to diversify
from previously bond-dominated portfolios look to reallo-
cate their capital. This is likely to put pressure on prices and
may force down cap rates, though opinions on this varied
among interviewees. Still, given currently healthy yield
spreads, it seems a plausible scenario.
Interest rates are not expected to rise significantly for the
foreseeable future. However, some interviewees suggested
that major Japanese banks might cut back on lending to
real estate since they have “reached a threshold” in terms
of sector allocation. Still, while the bigger banks may now
become more discriminating, it is hard to imagine that debt
will be unavailable given the current high levels of liquidity in
the economy.
With prices continuing to rise in Tokyo, many investors have
opted to invest in Japan’s secondary cities instead, at yields
of about 4 to 4.5 percent. Osaka has been popular in recent
years, although supply issues are looming for office assets.
Fukuoka and Nagoya also received positive reviews from
interviewees. As one investor said: “We like these metro
areas because we think there’s a chance of better rent
growth than in Tokyo. Part of that is that they’re coming off
a lower base—they went down further than Tokyo, so you
have more room to come back up.” That said, secondary
cities are seen as traditionally risky investments: “There’s a
very shallow market in those regional cites and cycles are
very rapid, so there’s a risk of oversupply and a softening of
the market taking hold very quickly.”

Asia Pacific 2017
sounds a bit of a cop-out that you have to be more opportu-
nistic, but that’s the reality. So we are definitely seeking these
things out. We’re saying, ‘That’s quite attractive, let’s dig into it
and see if it’s interesting.”
Niche options mentioned by interviewees included the following:
●● Sub-logistics centers. While the rapid growth of
e-commerce retailing and ongoing shortages of modern
warehouses continue to earmark the logistics sector as
a favored asset class for many interviewees, the problem
with building major strategic facilities (apart from their
being the preserve of specialists and institutional inves-
tors) is that “everybody is now doing them, which means
pricing is being driven pretty aggressively.” However, the
growth of e-commerce fulfillment is now also creating
demand for a subsector of smaller units designed to cater
to last-mile deliveries, often based in conveniently placed
Grade-B buildings in downtown areas. As one investor
said: “People are looking for instant delivery within a cou-
ple of hours, so you have to have a series of subcenters
as well as the big modern warehouses—that’s attracting
quite a lot of attention.”
●● Student housing. This sector has already become a dis-
crete asset class globally, with institutional investors active
mostly in the United Kingdom and the United States. As
opportunities in those markets begin to fade, however,
interest is turning to other destinations, mostly in mainland
Europe, according to a recent study by brokers Savills. In
the Asia Pacific region, student housing investments have
been seen mostly in Australia, where it is now a US$15 bil-
lion industry. Opportunities elsewhere in Asia are relatively
unexplored, but have obvious potential in cities with strong
academic reputations such as Hong Kong, Singapore,
and Tokyo.
●● Data centers. Until recently, data centers were another
area where investors looked but did not touch. There
have been several recent instances of investors taking
the plunge, however. One example involved an inter-
national fund backing a Chinese data center operator
focused on wholesale build-to-suit infrastructure, aiming
to create long-term cash flow and monetize into the core
market. While such projects involve plenty of red tape in
China, obtaining land for them is relatively straightforward
because they are regarded as priority projects. In addition,
“data centers in a lot of other markets are highly commod-
itized, so it’s hard to get the returns—in China, we think
there are outsized returns because it’s quite complicated
and heavily restricted.” Currently, data-center investments
have added appeal because many governments are now
in the process of nationalizing network infrastructure out
of concerns about disclosure risks for data held out-of-
country. Localization is also being driven by bandwidth
considerations, as huge amounts of data continue to be
shifted to the cloud from end-user computers.
●● Senior housing. Australia apart, this is another option
that historically has seen more talk than action, as inves-
tors cast around for a viable business model in a cultural
context where parents have traditionally been cared for
by their children. There is no questioning the fundamental
and long-term demand, however, which will require invest-
ment on a scale that would appeal to institutional investors
needing to place large amounts of capital. Various formats
are emerging. In particular, Japan recently introduced a
framework of health care REITs dedicated, among other
things, to senior housing. So far, however, their appeal has
been limited. According to one Japan-based fund man-
ager: “We looked but couldn’t find any good opportunities.
[The ones we found] are generally too small. Stock prices
of listed senior housing J-REITs are also not performing
well, so they’re not so attractive.” Another model under trial
in more mature markets such as Hong Kong, Singapore,
and Japan incorporates an “aging in place” model
whereby retirees purchase a lifetime interest in a property
built primarily as a home but redesigned with an aging
person in mind. Targeted returns are in the 8 to 10 percent
range. Again, however, the model has yet to gain traction,
mainly because the reversionary interest in the property
goes back to the developer upon death. According to one
investor: “I think the model needs tweaking or fine-tuning
for that particular element, but otherwise potentially it’s
a way forward throughout Asia.” China, meanwhile, is
struggling to come up with a regulatory framework that will
encourage private investment in what is a completely new
asset class for that market. While cultural and affordability
issues continue to deter investment, there is hope that
cash-rich domestic life insurance companies may be per-
suaded to invest in assets that would be a suitable match
for their long-term liabilities.
●● Multifamily. Though currently an outlier, this is an area
worth watching. While multifamily (i.e., residential rental
properties) has never been a favored sector in Asia (Japan
excepted), some interviewees saw it as a potential growth
area following the boom in the U.S. multifamily sector,
which has created around 7 million new renter households
since 2006, mainly on the back of the foreclosure crisis
and ongoing demand for downtown living. Given that
steep residential price increases in most Asia Pacific mar-
kets have made homeownership a distant dream for many
younger workers who therefore have little choice but to
rent, the case for institutionalizing demand from a captive
audience seems strong. “Everyone’s talking about it now,
particularly in Australia,” said one investor. “It’s been here
for years in Hong Kong, where [the big developers] have

Asia Pacific 2017
got lots of blocks they keep for rent, basically like a private
REIT sector. It’s not been considered so much a tradable
asset in the past, but now people are looking at creat-
ing one.” Currently low yields for residential properties,
potentially high management costs, an unfavorable tax
framework, and the absence of available en bloc assets
in most markets will likely prevent rapid adoption of such a
strategy. However, according to one Australia-based fund
manager: “You would have to say we are ripe for that initia-
tive. The investment capital is there if it can see a pipeline
that is as lucrative as a build-to-sell product, so I think
you’ll see developers stepping into that space and invest-
ment capital following it. I would expect some activity in
the next 12 months—you’ll be looking at offshore funds
coming in with probably a lower cost of capital.”
Currency Speculation and Hedging
Past experience makes most fund managers reluctant to
underwrite assumed currency upside into real estate deals,
but the current dearth of investment options has left at least
some investors more willing to take a view on exchange rate
movements, especially where currencies have seen big
moves or are trading outside historical norms. Japan, for
example, was mentioned by one interviewee as a destination
for Hong Kong capital looking to borrow in yen, lever up, and
“play the yield gap game,” with an assumed upside in yen
appreciation.
Currency speculation is more likely to feature in investments
by local high-net-worth (HNW) capital, which generally adopts
a less disciplined approach to investment. Brexit, for one,
has been seen as a golden opportunity by some to lock in
long-term value in London property. According to one Hong
Kong–based interviewee: “A lot of Asian opportunistic capital,
especially high-net-worth and family offices, are using Brexit
as a catalyst to invest in the U.K., mostly looking at residential.
Partly it’s a pure currency thing, but if their kids are studying
there they save so much in tuition fees they feel they might as
well buy a property.”
There have also been inbound Brexit-inspired deals involving
institutional or private equity capital, although these are not
generally driven by currency considerations. According to
a manager at one large fund group: “A number of our Asian
funds have already spent time looking at who might be under
pressure to sell in the U.K. and positioning themselves in a
way that if some of the [U.K.-based] funds find themselves
under pressure to sell because of redemptions, they’re able
to pick up those assets—they’re not necessarily looking to
buy at a discount, it’s just an opportunity to buy assets that
wouldn’t otherwise be available.”
In addition, ongoing exchange rate volatility in most emerging-
market economies has led to a growing focus on hedging,
most notably in jurisdictions where investors have not pre-
viously opted to hedge. This is another reflection of the
predominantly defensive stance that many investors have
adopted and has in general “become a challenge,” as one
fund manager put it, “especially now that you’re having to
mark to market more regularly as well.”
In China, for example, hedging has recently become the norm
due to a growing consensus that the renminbi will depreciate
going forward, bucking a long period when it moved only in
the opposite direction. According to one interviewee: “From
2004 to 2015, foreign buyers would be laughed at if they
hedged; now, every offshore investor is saying you need to be
careful.” This has added an extra layer of complexity to China
trades given that lack of capital account convertibility means
such deals must be done as offshore nondeliverable swaps—
a relatively illiquid and volatile market.
Otherwise, hedging continues to be the norm for foreign
investors in Australia, where the government would probably
Exhibit 1-12 Mainland and Hong Kong Chinese
Investment in Central London Real Estate
0.0 0.5 1.0 1.5 2.0 2.5
£ billions
2016*
2015
2014
2013
2012
2011
Source: JLL.
*Through September.
Exhibit 1-13 Average Current Currency Hedging Costs
per Annum, 2011–2015
Foreign currency
AUD JPY CNY EUR GBP USD
AUD — 2.1% –2.4% 2.1% 0.9% 0.8%
JPY –2.2% — –4.6% 0.0% –1.2% –1.3%
CNY 2.3% 4.4% — 4.4% 3.2% 3.2%
EUR –2.2% 0.0% –4.6% — –1.2% –1.3%
GBP –1.0% 1.2% –3.4% 1.2% — –0.1%
USD –0.9% 1.3% –3.3% 1.3% 0.1% —
Sources: Deutsche Asset Management; Bloomberg, March 2016.
Homecurrency

Asia Pacific 2017
prefer to see the currency drop further. This can be problem-
atic because the high cost of doing so “really eats into your
returns,” said one fund manager. “It means you’re going to
be a core or core-plus investor—you can’t be opportunistic in
that market.” Hedging costs in South Korea are similarly high,
while very low costs in Japan have been one factor in Tokyo’s
longstanding popularity among international investors.
Metro and Satellite Areas
Investments in suburban locations have become an increas-
ingly popular theme, especially in gateway cities. There are
a number of reasons for this. Most obviously, metro areas
offer generally higher cap rates than do central business
districts (CBDs). In addition, owners of buildings in CBDs see
little upside to selling assets in the current environment in the
absence of a pressing need to liquidate (such as fund expira-
tion). This means there are often more deals to be done in the
metro area.
Finally and perhaps most important, demographic trends
favor ongoing migration to urban areas that geographically
restricted CBDs cannot physically accommodate, creating a
long-term structural shift in favor of non-CBD sites. Multiple
interviewees noted the proliferation of deals in decentralized
parts of Shanghai, Sydney, Mumbai, and Jakarta premised
on the basis of upgraded transportation infrastructure that is
creating high-speed corridors into city centers. Singapore is
another city where this process is ongoing, although ready
supplies of land make decentralization there less problematic.
In Shanghai, land prices anywhere near the city center have
mushroomed to levels described by interviewees as “ridicu-
lous,” “unjustified,” and “unsustainable”—a problem due
in general to “cross currents of liquidity, low interest rates,
and a shortage of quality assets,” and in particular to buy-
ing by large state-owned enterprises for whom the site’s
actual development value is a secondary consideration.
The municipal government’s long-term master plan aims to
address this by limiting population growth in the inner city
while simultaneously shifting new demand to satellite cities (in
particular Hangzhou and Suzhou) connected to Shanghai by
high-speed rail. As a result, there is a long-term drift in devel-
opment and investment activity to these locations.
Japan has a curious twist on this theme in that there is less
inclination for investors to migrate outward to Tokyo’s metro
areas than to buy assets in secondary cities. At present,
Osaka’s office sector is considered by many to be fully priced,
but Japanese regional cities in general offer good yields and
some of the best yield spreads over local sovereign bonds
in Asia. A broad range of assets in various other Japanese
provincial cities also is attracting investor interest. City-center
and station-front locations seem always in demand. Nagoya
was mentioned frequently, as was Fukuoka.
In Sydney, demand has also shifted to suburban areas. “I
think an investment strategy well placed to leverage the
[transport] infrastructure spend that will happen here over the
next ten to 20 years is really important and a huge opportu-
nity as well,” said one fund manager. As part of this, Chinese
investors have now begun diversifying away from their initial
CBD-oriented strategies, investing recently in development
sites in Sydney’s southwest suburbs. They have also been
“aggressive” investors in Melbourne’s suburban nondiscre-
tionary retail centers, buying at 5 percent yields, according to
one investor active in the sector. In general, he added, “every
other city about 100 kilometers from the capital cities is doing
pretty well and we’d buy there.” Internal rates of return (IRRs)
of 8.5 percent and yields of 6 to 7 percent are the norm.
The migration to the suburbs is also consistent with the
increasing use of development models featuring mixed-
use projects allowing residents to live and work in the same
neighborhood—a huge bonus in the growing number of Asian
cities where road congestion can mean spending hours in
traffic jams commuting to and from work. To be successful,
such projects need critical mass in order to draw people in,
one interviewee suggested, although another view was that
the same result could be replicated on a smaller scale in line
with many residential projects being built in the United States,
which incorporate small, equipped offices built on lower floors
for use by residents.
Developing Markets
The turn in sentiment in favor of markets and assets that offer
higher returns is nowhere better illustrated than in this year’s
ULI investor prospect rankings, which saw higher-yielding
emerging-market cities top the standings. These include in
particular cities in India (which hitherto had languished at the
other end of the table) as well as Ho Chi Minh City and Manila.
With the caveat that sentiment is one thing and actually plac-
ing capital is another, there could be no clearer indicator of
how investor perspectives are changing as interest migrates
away from conventional destinations in the quest for yield. In
the words of one Hong Kong–based consultant: “All the inves-
tors we deal with are now looking for opportunity outside their
traditional markets.”
The meteoric rise of India up the rankings is predicated
mainly on the belief that it offers early entry the type of
long-term growth that has already occurred in China. More
immediately, it is also due to efforts by the current administra-
tion to improve transparency and efficiency by overhauling
outdated tax structures and implementing pro-investor legisla-
tion. In particular, the introduction of a Government Standard
Tax (GST) should significantly boost logistics operations by
cutting red tape and lowering taxes, while the passage of
the landmark Real Estate (Regulation and Development)

Asia Pacific 2017
Act (RERA) in March 2016 promises to transform residential
development by imposing more transparency and account-
ability on an industry often notorious for long delays. A new
REIT framework currently in the pipeline now promises better
exit strategies, although this may prove harder to implement
than many expect.
In terms of activity on the ground, most foreigner investors
active in India are currently sovereign, institutional, and large
private equity funds looking for big-ticket transactions. Early
entrants came to market around five years ago, targeting invest-
ments in business parks that provide office space to India’s
booming offshoring industry, especially in Bangalore. These
have proved extremely successful. One investor in the office
space reported rental growth of 15 to 20 percent per annum,
adding that “you can develop to 12 to 14 percent yield-on-cost
in India on the office side if you get the right land.”
With much of India’s limited stock of established income-
producing commercial property having been snapped up
already, attention is turning to taking equity-level stakes or
establishing platforms with local developers to pursue develop-
ment projects. Some institutional players have allocated capital
to local funds to invest on a separate account basis. Providing
structured debt to domestic residential developers also remains
a popular play, with cost of capital now standing at 16 to 18
percent, compared with the low 20s a few years ago.
Cap rates, meanwhile, have compressed steadily from levels
north of 10 percent a year ago to about 9 percent today. They
continue to head down. In one upcoming deal, a large Indian
developer was negotiating with foreign investors for the sale of
a portfolio of prime commercial assets at a cap rate of around
7 percent, according to one India-based interviewee, who
commented that this was “approaching the red line—at that
level, I think things are beginning to look a little tough going
forward.” While that may be true, there may still be takers at
these prices.
Vietnam is another emerging-market play that is drawing a
lot of attention. As one investor put it: “I think if you asked in
terms of any of the emerging markets, Vietnam will be well
ahead of the pack from virtually all investors’ perspectives.”
Economically, the story is similar to China’s. The course it
is charting covers similar ground, with a multitude of light-
manufacturing facilities producing goods for export. Growth in
Vietnam is likely to accelerate primarily because it is seen as
an ideal alternative to manufacturing in China, where costs are
Exhibit 1-14 Real Estate Transparency Scores: Asia Pacific
Transparency level Market 2016 rank 2016 score 2014 score 2012 score 2010 score 2008 score
High transparency Australia 2 1.3 1.4 1.36 1.22 1.15
New Zealand 6 1.4 1.4 1.48 1.25 1.25
Transparent Singapore 11 1.8 1.8 1.85 1.73 1.46
Hong Kong 15 1.9 1.9 1.76 1.76 1.46
Japan 19 2.0 2.2 2.39 2.30 2.40
Taiwan 23 2.1 2.6 2.60 2.71 3.12
Malaysia 28 2.3 2.3 2.32 2.30 2.21
Semitransparent China–Tier 1 33 2.5 2.7 2.83 3.41 3.34
India–Tier1 36 2.6 2.9 3.07 3.11 3.44
Thailand 38 2.6 2.8 2.94 3.02 3.21
South Korea 40 2.7 2.9 2.96 3.11 3.16
Indonesia 45 2.7 2.8 2.92 3.46 3.59
Philippines 46 2.8 2.8 2.86 3.15 3.32
China–Tier 2 55 3.1 3.0 3.04 3.38 3.68
Low transparency Vietnam 68 3.5 3.6 3.76 4.25 4.36
Source: JLL, The Global Real Estate Transparency, 2016.
Exhibit 1-15 Foreign Investors Looking to Buy Vietnam
Properties
22+17+14+8+7+7+6+3+3+13CSource: CBRE Research, fourth quarter 2015.
United States
Hong Kong
Other
Australia
China
Taiwan
Malaysia
Japan
South Korea
Singapore
13%
3%
3%
6%
7%
7%
8% 14%
17%
22%

Asia Pacific 2017
rising and the business environment has become more chal-
lenging for foreign investors.
In the past, most international investors in Vietnam targeted
the residential sector, with a focus typically on mid- to
high-end developments. But with the condominium market
currently “saturated” and the economy seeing rapid growth,
“the commercial market is now definitely one to watch in
Vietnam, especially the Ho Chi Minh City office market, which
is very strong at the moment—that’s where we’re looking
actively.” There also is a nascent market for institutional invest-
ment in completed offices in both Hanoi and Ho Chi Minh City.
Pricing is high, with yields at around 7 to 8 percent, although
“there’s not too much supply coming on past the next couple
of years,” according to one fund manager. The market is
popular with the Japanese and also the big integrated devel-
opers out of Singapore and Hong Kong.
Rapid industrialization in Vietnam suggests that there should
be scope for investments in logistics and business parks, but
so far these sectors have yet to see significant momentum.
Indonesia was the first of the Southeast Asian markets to
enjoy widespread popularity in ULI surveys, but while interest
remains, the city’s ranking has slipped. One particular prob-
lem is a huge amount of oversupply in the office sector, just as
demand has dropped from oil and gas companies in line with
falling resource prices.
Cumulatively, this has led to soaring vacancies, together
with a flight-to-quality scenario. “People are looking to move
because rents have fallen 50 percent in some prime build-
ings,” said one locally based fund manager, who noted that
cap rates have moved out from about 6.5 percent to 10
percent or more. The bigger problem, however, is that “there
are no real transactions. So it’s a wait-and-see game now—if
you’re in a good location, you’ll be okay over the long term,
Australia: Key Themes
The longstanding appeal of Australia as a destination for
both domestic and international core investors remained
undiminished in 2016—a result of a transparent, mature
market and relatively high yields across multiple asset
classes. Australia is seen increasingly as a safe haven
by foreign investors seeking to avoid rising risks (such as
Brexit) in other developed markets. At the same time, the
acute shortage of investable assets that has been such a
theme across the region this year applies even more so to
Australia because of its small size relative to peers such
as Japan, and because it is a market so focused on core
product. According to one locally based fund manager:
“The amount of capital looking for opportunities vastly out-
weighs the opportunities available because the universe
of institutional-quality real estate is small. Managers are
holding onto quality assets because where else are we
going to invest?”
Meanwhile, the divergence in fundamentals between
cities traditionally reliant on commodities exports (Perth,
Brisbane) and those focused more on the professional
services (Sydney, Melbourne) remains. In part, this
reflects positive GDP growth driving absorption in the
biggest cities. In addition, it speaks to constrained sup-
ply in Sydney due to the end of the current development
cycle (in particular at Barangaroo), together with a wave
of residential conversion projects and an ongoing light-
rail construction scheme that will remove some 360,000
square meters (or 6 to 8 percent of current stock) from
the market. Projected double-digit rent growth over the
next three or four years made Sydney’s office sector the
number-one pick of most Australia-based interviewees.
Further gains are also expected from declining incentives,
which are likely to fall from a current 30 percent to around
23 percent by the end of 2017. Melbourne should also see
rental growth, albeit at a somewhat lower level.
Given especially the decline in cash base rates, most
interviewees expect cap rates to tighten further, although
on a net basis they are already somewhat lower than they
appear due to the impact of incentives. Office yields are
especially tight at just over 5 percent. Given that, many
investors are switching their focus elsewhere.
The new areas of focus include build-to-core projects,
buying into Grade-B assets (although yields here are also
compressing), and investing in non-CBD areas, especially
in Sydney, where a huge infrastructure construction pro-
gram now underway promises to transform outlying areas
over the next ten years (notably in the western suburbs).
In addition, logistics centers have now become popular
targets, especially among domestic and Singaporean
institutional investors. Currently trading at yields “north
of 7 percent,” they offer “more of an institutional market
compared to Singapore, with longer-term commitments,
good-quality buildings, and good credit,” according
to one Singapore-based REIT manager. They are also
generally yield-accretive for already high-yielding REITs.
Many big local investors are also building greenfield facili-
ties, so the space is crowded.

Asia Pacific 2017
but if you’re in an area with little or no infrastructure and your
building has poor amenities, you’re kind of doomed.”
Perhaps unsurprisingly, Jakarta was mentioned as a potential
source of distress in the future: “Not the distressed kind of
Asian financial crisis stuff, but certainly it could potentially be
a very good cyclical point of entry.”
The Philippines also continues to appeal to foreign investors,
with good growth in just about every sector, especially the
office-oriented business process outsourcing (BPO) market.
The biggest challenge currently is accessing land, together
with increased competition for deals.
The real problem in the Philippines for international funds,
however, is that the market has always been hard to access
because it does not have much need for what foreign capital
has to offer. According to one locally based developer: “The
reality is that while foreign investors like the Philippines, there
aren’t many specific deals they can do or players to work with.
Real estate assets are not being actively traded or sold here,
and the exit strategy is also unclear—buildings mostly are
built and held by developers for income generation.”
A foreign fund manager’s perspective was along much the
same lines: “We like it as a market, but we’re very partner
driven and we just haven’t found the right confluence over the
last five years of partner opportunity and pricing. So we’ve
stayed away.”
Affordable Housing Boom
Because residential developers generally make more money
making high-end homes, it is natural that a disproportionate
amount of investment in emerging markets, where strong
demand exists at all price points, is funneled into luxury hous-
ing. That is beginning to change, however, partly at the behest
of local governments, but also because of emerging oversup-
ply issues.
Retail is another sought-after area. The big regional shop-
ping centers currently yield more than the local office
sector, a reversal of the historical norm. This provides
“potential for significant upside in the space over the
next 12 months,” according to one local fund manager,
although it may be hard to realize (other than investing in a
REIT) given that this type of asset rarely comes to market.
Beyond this, low-growth and subregional centers are
proving problematic due to the threat from e-commerce,
but higher-growth regional malls nearer to big cities offer
good potential for redevelopment as department stores
retrench. This has become a major theme as landlords
move to reposition and generally refresh their holdings.
Residential markets continue to generate concern in some
quarters as prices rise ever higher. With Sydney now
ranked as the second-least-affordable housing market
in the world by analysts Demographia (Melbourne is at
number six), banks have tightened lending requirements
for both developers and retail homebuyers, especially
from abroad. Population growth remains a strong theme,
however, both in terms of strong immigration patterns into
Australia from abroad, and high rates of internal migration
as the commodity boom fades and workers move back to
cities from outlying areas. This provides capacity to soak
up a currently large residential supply pipeline, especially
for areas with good access to city centers, which remain
in high demand.
Large amounts of foreign capital continue to arrive in
Australia looking for deals, although 2015 was the first in
many years where domestic purchases were the larg-
est component of investment-grade acquisitions. This
reflects pressure from the huge weight of capital held by
Australia’s domestic pension funds, which continues to
grow as individual contribution requirements rise and as
funds move to reallocate assets to real estate in prefer-
ence to domestic stocks and bonds.
Major global investors in the first half of 2016 include the
United States (US$2.2 billion) and China (US$1.4 billion),
according to CBRE. Chinese developers continue to
focus on residential development, including city-center
conversions from Grade-B office to high-end residential.
Some problems have emerged, however. According to
one interviewee: “A number of [Chinese] groups have paid
some massive prices for assets on the basis that they can
double their floor space over and above the current plan-
ning regime, then realized that that’s not necessarily the
case because the regime is fairly rigid. So some of those
will be pushed into the next development cycle.” With the
number of suitable assets dwindling, the conversion play
may fade going forward.
While the lack of familiarity with the local market means
that foreign investors are generally reluctant to migrate
away from the CBD, a lack of available stock means they
often have little choice if they want to place capital. In
particular, Chinese buyers have been reported buying
suburban sites in Sydney, both for their land banks and
for residential developments, generally in areas with
good schools.

Asia Pacific 2017
China was the first Asian country to actively promote large-
scale development of affordable housing, kicking off a
scheme in 2011 that has generated construction starts of
some 5 million units per year. Margins are thin to nonexistent,
however, so projects are unlikely to interest private-equity
investors, although to a certain extent they are unavoidable
because a fixed percentage of most land auctions is usually
compulsorily dedicated to affordable housing.
In Indonesia, according to one Jakarta-based fund manager,
recent weak sales of mid- and high-end housing contrast with
strong demand for lower-priced homes (i.e., selling for under
US$40,000). Affordable housing schemes are now drawing
institutional interest from international funds and “offer mid-20s
IRR and a two-times multiple—you can also exit quite quickly
because construction techniques are very simple.”
Featuring a huge demand/supply gap, India is another market
where affordable housing is now a strong policy-backed
theme. Recent tax breaks have created realistic develop-
ment margins that have now begun to attract foreign investor
interest. While the sector has long been stymied by land
shortages and bureaucratic inertia, the Modi government
has acted to jump-start low-cost housing construction, with
new starts doubling in the first half of 2016 compared with
the same period of the previous year, according to brokers
Cushman & Wakefield. Given that mid to high price points
are currently stalled, more investors are now being drawn to a
sector that offers long-term cash-flow opportunities.
Other emerging markets where government policy may soon
promote affordable housing initiatives include Vietnam and
the Philippines.
Prices Rise, Homes Shrink
Low interest rates, strong demand, and ongoing housing
shortages continue to drive residential prices up in most Asian
markets. For several years, the regulatory response of govern-
ments across Asia (with the exception of Japan) has been the
steady rollout of tax-based and other restrictive policies aimed
at deterring speculative home purchasing. Most recently,
these responses have targeted foreign, and in particular
Chinese, buyers.
Reacting to continuing price increases in Australia, there-
fore, various state governments there have introduced tax
surcharges in 2016 on foreign purchasers that range from
3 percent (Queensland) to 4 percent (New South Wales) to
7 percent (Victoria), with more to come in 2017. Of greater
importance, in April Australian banks cut off new lending
facilities to foreign homebuyers who are neither citizens nor
residents, ostensibly on the basis of widespread income
documentation fraud. This has had a debilitating impact on
foreign buyers and created a spike in settlement risk as for-
eign off-plan buyers scramble to find finance. Combined with
an upcoming wave of apartment completions in Sydney and
Melbourne and the recent introduction of Chinese government
policies restricting the flow of outbound capital from China,
this has created, in the words to one locally based developer,
“a perfect storm” for foreign buyers. So far, he said, this storm
has “not manifested in a broader market sentiment drop—
most of the sales in existence at the moment have all made
good money, so there’s a good incentive for people to settle.”
However, while the full impact will probably take time to appear,
it is noteworthy that Chinese homebuying activity in other
regional markets has experienced steep declines after the intro-
duction of similarly restrictive rules in those jurisdictions.
Home prices in China, meanwhile, remain notoriously volatile.
Supply gluts in smaller cities are slowly being worked off and
sentiment generally has rebounded sharply in 2016, with
prices in the top 100 cities rising 17 percent year-on-year from
their trough in August 2015 (compared with 24 percent in the
top ten cities), according to data supplier CRIC.
This has resulted in the most intensive round of regulatory
tightening since 2011, with new measures ranging from higher
downpayment requirements to bans on out-of-town buyers.
Even then, as of the end of September, “demand and senti-
ment are such that the measures don’t seem to have had as
much effect as Beijing would like,” said one interviewee. A
particular problem in the big cities is now a lack of supply, with
inventories in Shanghai and Beijing down to “unheard of” low
levels of just three to four months. As a result, “anything that
Exhibit 1-16 Indian Affordable Housing Construction
(number of units)
8,698
17,130
32,997
36,267
10,662
7,525
425 925
1H 20161H 2015
LuxuryHighMidmarketAffordable
Source: Cushman & Wakefield.

Asia Pacific 2017
can be bought is being bought.” More tightening measures in
individual markets seem inevitable.
While Hong Kong has registered a small decline from peak
pricing reached in the second half of 2016, buying momen-
tum picked up in the second half of 2016, although mainly for
new-build properties that offer high loan-to-value developer
financing. This leaves Singapore as the only major market
where house prices appear to have been effectively con-
tained. Even then, however, price declines for mass-market
homes in each of the last five years have been modest, with
larger declines restricted to higher-end properties.
The conclusion appears to be that in the absence of a
higher-interest-rate regime, Asian property markets are likely
to remain robust. In general, values rise in spurts and show
little inclination to fall. One result of this is that, in order to
provide affordable products, home sizes are continuing to
shrink, sometimes to barely believable levels. Some new
developments being sold as “youth apartments” in Shenzhen
and Shanghai (where recent home price rises have been the
strongest in China) are barely 130 square feet in size. In Hong
Kong, this trend has also taken off in a big way, with at least
one major developer adopting the “matchbox” model as a
major plank of its development strategy, focusing on apart-
ments with footprints of just over 160 square feet.
Millennials and the Sharing Economy
Another way to look at the gradual shrinking of residential
footprints in Asia is that—in line with emerging models in the
United States—it reflects demand from a younger genera-
tion of millennial occupiers willing to accept less personal
space as long as they also have access to shared social
facilities such as gyms, kitchens, living areas, and even office
space within the same building. This has to some extent
been recognized by local developers and designers, who are
increasingly including more and better shared spaces in new
residential and office projects.
While it is questionable whether this is really a choice that
millennials make willingly, several interviewees noted that
changes in millennial living habits are likely to have a long-
term impact on the design of living spaces around the Asia
Pacific. Ever-smaller footprints are only one aspect of this.
As one Japanese interviewee noted: “My employees are the
same, but people in their 20s and 30s don’t buy their own
houses anymore, they don’t buy cars or drive.” The result, he
suggested, was a probable increase in family-type apart-
ments, presumably on the basis that children will opt to remain
living with their parents. From an even longer-term perspec-
tive, questions arise over the need for parking spaces as the
growth of shared transport services such as Uber eats into
car-ownership rates.
Exhibit 1-17 Major Housing Markets Ranked by Affordability, 2015
0 2 4 6 8 10 12 14 16 18 20
Median multiple
Miami
New York City
Brisbane
Bristol
Adelaide
Perth
Toronto
London exurbs
Plymouth & Devon
Los Angeles
San Diego
London
San Francisco
Melbourne
Auckland
San Jose
Vancouver
Sydney
Hong Kong
Source: Demographia.
Note: Affordability is determined by home price divided by household income.

Real estate trends 2017

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